Palm Oil Faces Bearish Brew of Record Production, Weak Demand

Palm oil is expected to reach record production in 2019. That, combined with forecasts by some analysts for stagnant or lower demand this year, has sent palm oil futures prices down 7 percent from a month ago. Adding to the glut: Palm oil stocks are also sitting at record levels.

In Indonesia and Malaysia, which produce over 80 percent of global palm oil, production was stunted in 2015 and 2016 due to El Nino related droughts in Southeast Asia, but bounced back strongly as weather improved and Indonesia continued to expand acreage. Consecutive record production years in 2017 and 2018 rebuilt stocks. Favorable weather over the last few months in both countries has solidified forecasts for another record year of production.

Palm oil futures prices fell to a three-year low in November on the high stocks levels. Prices bounced in December and January, following strength in soybean oil, which was supported on optimism around the US/China trade talks. Soybean oil prices also fell in February, but palm oil fell more, as the commodity’s particular supply and demand dynamics added to the pressure.

Meanwhile, demand for palm oil is relaxing. In June 2018, the EU, the second largest importer of palm oil, voted to cap its use in transport fuels at 2019 levels and phase it out altogether by 2030. The EU’s aim is to discourage deforestation in Southeast Asia as part of a larger effort to reduce greenhouse gas emission. India is set for record domestic oilseed production, which will cover incremental growth of domestic consumption and keep import demand similar to last year, according to the executive director of the Solvent Extractors Association of India, an industry group that represents oilseed producers. The US/China trade negotiations will also affect demand for palm in yet another ripple of the trade war. If a deal is made and China resumes importing large amounts of soybeans, that country’s need for palm imports will be reduced. Conversely, China’s soybean imports so far this year are lower and expected to be down from the previous season if the tariffs remain in place.

Indonesia attempted to address the growing stocks of palm oil by expanding its B20 biodiesel mandate, requiring blending of fuels with 20 percent biodiesel across all transport sectors in September. Further, the country aims to increase the blending rate to 30 percent by 2020. In Malaysia, the blending mandate was increased to 10 percent from 7 percent on Feb 1. According to the president of the Malaysian Biodiesel Association, the country is targeting an increase to B20 next year. Malaysia also has an issue on the production side of the balance sheet. Aging trees are hindering yields—20 percent of the trees are older than 20 years and past their prime. Malaysia’s average yield fell below that of Indonesia for the first time in 2018. A higher rate of replanting will be required to prevent long-term yield declines.

While the two primary producers of palm oil attempt to mandate higher usage, the fact remains that stocks are at record levels and production is set to post a new record in 2019. The Malaysian Palm Oil Board reported the highest level of stocks in its 20 years of data at the end of December. Low prices will help spur demand, as was seen in higher exports from Malaysia in January and an agreement with China to purchase 1.62 million tonnes. But, it will take an extended period of strong demand to offset big production and reduce stocks.

As palm oil production heads into its third consecutive record year, the traditional biggest importers, India and the EU, are signaling lower demand. As a result, palm oil futures prices are down 7 percent from a month ago.